economics AOS2

• perfectly competitive market

  a hypothetical market where competition is at its greatest level possible
• CONDITIONS- 1.homogenous products

  • the products being sold are identical and easily substitutable for each other
• CONDITIONS-2. ease of entry into and exit from market

  • businesses will keep an eye out for possibilities to make new products so they can make lots of profit,if large profits can be made in a particular market new suppliers can easily join that market
• CONDITIONS- 3.large number of buyers and sellers

  they are all price takers-they have to buy or sell at the price dictated by the market
• CONDITIONS- 4. perfect knowledge

  • full information
  • makes it easy for them to compare prices
• CONDITIONS- 5. buyers and sellers act rationally

  buyer and sellers act in their own self interest
• CONDITIONS- 6. resources are mobile

  businesses use land,labour and capital to make products.

  if those resources are mobile it means they can easily be moved away from a less profitable market to a more profitable market
• CONDITIONS- 7. consumers have sovereignty

  sovereignty means market power

  consumers make buying decisions that decide how resources are to be allocated
• Law of demand

  there is an inverse relationship between price and quantity demanded
• demand

  represents the willingness and ability of consumers to purchase goods and services
• income effect

  when a product becomes more expensive fewer people have the income needed to buy it : quantity demanded decreases
• substitution effect

  when a product becomes more expensive some buyers will look for a cheaper alternative: quantity demanded decreases
• demand curve

  shows the total quantity of the product demanded at any given price
• movement along the demand curve

  is caused by a change in price
• a shift of the demand curve

  is caused by a factor other than price